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Countdown to new tax charge for freelancers and contractors

Written by: Emma Lunn
Freelancers and contractors have just five months to get ready for employment tax changes that will affect how they work and are paid.

Self-employed workers affected by new off-payroll working rules got a year’s grace when the coronavirus pandemic began, with the introduction of IR35 delayed by a year.

The new regime is set to begin on 6 April 2021, a year later than the planned April 2020 introduction.

What is IR35?

IR35 or the off-payroll working rules can apply if a worker or contractor provides their services through their own limited company or another type of intermediary to the client, but who would be an employee if the intermediary was not used.

Self-employed contractors typically work under this kind of arrangement to reduce the tax they pay. Such workers are called ‘deemed employees’ by HMRC.

The IR35 rules aim to make sure that a worker, who would have been an employee if they were providing their services directly to the client, pays broadly the same tax and national insurance contributions as an employee.

In the past the contractor decided whether their working arrangements fell inside or outside IR35. But from April 2021, their employment status will be determined by the client. If the client decides that IR35 should apply to the engagement, payment to the contractor will be taxed at source.

What’s the effect of IR35?

From April 2021 companies hiring independent contractors must undertake detailed assessments to determine whether each contractor is caught by IR35 and so, in turn, should be taxed as if they were an employee.

If it’s decided that IR35 applies to a particular relationship with a contractor, the company will have to operate PAYE and tax the payments to the intermediary firm as if it were income from employment.

If your working arrangements fall within IR35 the financial impact can be significant as it can cost the typical limited company contractor thousands of pounds in additional income tax and national insurance contributions.

The Association of Independent Professionals and the Self-Employed (IPSE) recommends contractors have tax investigation insurance which will provide legal help in the event HMRC looks into your working arrangements.

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